This is not the current Retail Forecast, but is here purely for information. Please PRESS 'Retail Forecast 2011-12' on the menu to find the current forecast.

Economic Forecast for Retail for 2009 to 2010

'Hard pounding, Gentlemen'

An Economic Analysis and Forecast for the Retail Sector
from the Centre for Retail Research

The Main Questions
Most UK comment in any information medium about our economic prospects
seems to boil down to, 'You're all doomed, doomed I tell
ye'.

As economic analysis this lacks analytical rigour, but perhaps
shows why the index of consumer confidence fell from 93 points (June
2007) to 61 in June 2008.

Are things bad? Yes. Are things going to get worse?
Yes.

What people really want to know is:

'How bad will things get?' and

'When will things start improving?'

'What will this mean for the retail sector?'

That is what this paper is about. We avoid much economic jargon
and graphs.

Centre for Retail Research

Since
the centre returned to economic forecasting in 2003, we have had
a successful few years. We correctly forecast the retail downturn
in 2005-6, when others were blithely optimistic. We were correct
about Christmas 2005 and 2006 (optimistic when others were blithely
pessimistic 'the worst Xmas for 20 years' etc). We did not spot
the crisis arriving last year and we did not believe that the chaos
of September-October 2008 was theoretically possible. We were correct
in our belief that the Bank of England's fears about inflation would
inhibit significant reductions in the bank rate, but not that they
would spin on a sixpence in November 2008 and cut the rate to 3%.
We did suggest that failing banks would be stuffed with liquidity
and partially nationalised, which has occurred.

What is the Nature of the Current Economic Crisis?
There has been such an extensive account of the causes of our current
problems elsewhere, that we'll keep this short.

To quote my first lecture on the banking system in October 1969,
"All banking is based on a confidence trick. It only works if people
believe it. If you or I did what banks do, we would be arrested
for fraud. It's all about confidence." I said the same every year
for 20 years, so it is not difficult to remember.

In those days, confidence was based on (a) reputations
built up over centuries, (b) central bank control over the quantity,
quality and proportions of assets banks held and their
ability to lend, and (c) parsimonious lending by banks about how
much they lent and to whom they lent. Rather like turn-ups on gentlemen's
trousers these have all had their day.

Shortages of liquidity, the failure of inter-bank lending, and
foolish lending to people who cannot repay are the immediate causes
of the crisis. The collapse of asset values, particularly houses,
has savaged the balance sheets of banks and other companies. They
cannot borrow against depreciated assets; they cannot sell them;
and the fall in asset values makes it imperative for banks and businesses
to raise more cash and investment capital to bring their balance
sheets into balance.

Financial panic that started with American mortgages and affected banks over
much of the world has cut liquidity and the money supply, cut the
sale of houses, and hit the domestic and commercial property markets.
Consumer confidence and spending is cut to ribbons. Their wealth
has fallen with the fall in shares, pension entitlement and house
prices.

The three industries mainly affected are: banking/finance, housebuilding/
construction, and retailing. How important is this? Financial services
and retailing together
account for around 30% of the UK gross domestic product (GDP) -
so pretty important. After a slow start, the problem of falling
demand is now spreading quickly through the economy, consumer
led in services, finance and building and export led (downwards)
as foreign orders dry up as a result of the financial problems in
other countries and business contractions because they are not selling
so much abroad.

This was accentuated by a separate phenomenon - the increase in
oil, food, and commodity prices, which produce a shift in assets
in favour of producers of oil, farm goods, and raw materials. Recently,
commodity prices have fallen back (see chart), which should reduce
inflation. We don't see much prospect for further price advances
over the next 18 months.

Whilst the impacts of the financial crisis and the commodity-price
crisis are extremely serious, we feel that much of the comment from
media and politicians is actually frightening people. We were talking
ourselves into a depression and have now done so. The headline of
the London Evening Standard, when the Bank cut interest rates by
1.5% following pleas from business, politicians, commentators, and
the media was 'PANIC'. Commentary seems to be directed to
showing that actually things are very much worse than they
seem to be.

Retail Forecast

This is about shops rather than international economics, but these
are so tightly bound together that they can only be understood together.

The questions for retailers are:

When will people start spending again?

When will the economy turn upwards so that confidence returns?

The answer to both questions may be the same date, but probably
won't be. Retailing is a 'leading indicator' that signals when things
are turning nasty, but is one of the first to improve when things
are starting to go right. Indications are varied, but retailing
has been in trouble for a year.

We think there is a chance that people may start spending again
late next year, but, unlike our previous forecasts, April/May 2010
has the best chance of marking a retail revival. Here are the prospects:

Spending improves May/June 2009

5%

Spending improves October/Nov 2009

25%

Spending improves April/May 2010

50%

Spending improves 2011

20%

You will note that we think there is a good chance that recovery
will be delayed until 2011.

We may not know until April 2009 exactly how things stand for the
next couple of years.

We expect this recession to last two years. However, unlike our
January forecast, we feel its impact will be more severe and that
there is little chance of a sizeable upturn in the latter part of
2009. We are optimistic about 2010.

Over the next 12 months, in volume terms - ie allowing for inflation
- we expect

Retail sales

Fall by 0.8%-1.4%

Food & drink

Increase by 0.4%

Clothing and Footwear

Fall by 2.8%

Household, consumer goods

Fall by 4.7%

DIY/hardware/

Fall by 6.0%

Entertainment

Fall by 1.9%

Books & stationery

Fall by 1.9%

Other

Fall by 1.0%

Internet sales*

Increase 55%

(* includes retail merchandise only, not tickets
or travel)

The performance of individual businesses may be very much better
or very much worse than the above forecast.

We suggest a flat, although reasonable Christmas 2008, good New
Year's sales, a flat February and March, good Easter, and variable
sales in the rest of the year. We expect sales to be flat towards
the latter part of the year (rather than declining), probably a
good Christmas 2009 and things getting better thereafter.

Official Retail Expenditure data. This is so poor now that we suggest
that ONS estimates of changes in monthly retail spending should
be completely ignored. More comment on this later.

Rationale for the Forecast

Rather like the big dipper, you need to go down before you can
go up.

Economic news is dire and there is plenty of evidence that businesses
and consumers have adjusted their spending patterns downwards.
Retail sales are down, unemployment is rising, projects are being
postponed and costs and capital investment cut.

If this were simply a trade cycle involving weak demand it would
be possible to forecast its track more precisely. Added to the
trade cycle is: the failure of bank liquidity; weak bank balance
sheets; collapse of the housing market; consumer fear and panic;
and the destruction of created wealth by falling asset prices.
It will be five years before consumers get their mojo back and
they may never return to their old spending habits (but people
do forget).

However, there is evidence that people are reducing their reliance
on credit; spending less; and that much consumer discretionary
spending (eg holidays and consumer goods) has been cut back.

Although people feel worse off, living standards for those still
in a job should rise over the next 6 months compared to the last
6 months - fuel will be cheaper, mortgage payments lower, food
prices falling. Not good, precisely, but less bad.

A fiscal stimulus is likely in the UK and we can assume that
the new US Government will do the same.

In a few months' time therefore many people should have some
cash available and may be prepared to increase the proportion
of their spending that goes through the retail sector.

When will the economy stop falling?

There are 2 requirements:

Banks: When there are signs that (a) everything
horrid in bank balance sheets is known and allowed for, and (b)
bank liquidity in the UK and the US is sorted out. This is looking
pretty good in the UK and by Christmas or January 2009, these
problems may be screwed down pretty tight. The US looks pretty
flakey, its system of government may inhibit anything radical,
nobody knows whether Obama actually has an economics policy, etc
etc so we will see.

Housing: UK house prices stop falling, perhaps
in April to June 2009. This will be the signal for all the people
who have not been able to move house to get on with it, a resumption
of borrowing, money starts to circulate etc.

By the middle of next year therefore, banking may be sorted, many
people will have a bit more cash and savings (and have stayed away
from shops for many months), and the housing market starts going
again. Whilst it could be hectic enough for a reliable trend to
start in September/October, we think the process will be very slow
at first. Less bad, therefore, rather than GOOD.

A lot depends, therefore, on the prospects for jobs. The fall in
exchange rates may assist job creation in manufacturing and financial
services by April 2009. Unless we all get some more terrible shocks
in 2009, things should turn up late in 2009. And a good Christmas
2009!

What Else Needs to Go Right?

Oil and commodity prices stay low or fall further- the Budget
based its predictions on oil at $83 a barrel, it rose to$148 a
barrel in July, falling to $61 in November.

When
it becomes clear that inflationary pressures will not create a
wage-price spiral in the UK.

When bank liquidity improves so that they lend more readily
to one another. This requires the Central Bank to keep pushing
liquidity into the system. When banks get in difficulties, they
need to be rapidly sold or nationalised so that the financial
system does not break.

Confidence in Banks improves

The Sterling exchange rate stays midway between the US$ and
the Euro, supporting exporters.

No more terrible shocks to the economy, and problems are cleared
away quickly, including financial crises in Central and Southern
Europe and the Far East. The table on state spending shows that
some countries may have problems in debt servicing over the next
3-4 years.

We feel that the single most important issue is bank liquidity,
and the second most important is house prices.

Statistical problemsWe
have felt for the last two years that the data published by the
ONS (Office of National Statistics) do not report retail sales accurately.
We first reported our fears in 2006, but were particularly concerned
about the January 2007 results (see Retail Sales graph) which showed
sales see-sawing between December 2006 to to March 2007. This is
happening again - not the massive rise in the barchart in May 2008
and then the massive fall in June. This, we think, is the result
of the ONS being too wedded to the old structure of retailing, insufficient
measurement of aggressive discount stores, and weak data on Internet
sales.

Increasingly, retailers are reducing prices across the range or
concentrated on a small number of items and bringing in many new
products for a short period only. This makes it exceptionally difficult
to calculate changes in volume, particularly on a monthly basis.

Therefore the best (or least bad) measure of retail output
for the next few years is likely to be retail sales value rather
than volume measures. Although one will have to take price inflation
into account, the problem is that ONS volume data on a current basis
is likely to be incorrect.

General Outlook for Retail Sales
As explained in January 2008, we feel that unless there is a sudden
deterioration this recession will last two years. However, unlike
our January forecast, we feel its impact will be more severe and
that there is little chance of a sizeable upturn in the latter part
of 2009. We are very optimistic about 2010.

Over the next 12 months, in volume terms - ie allowing for inflation
- we expect

Retail sales

Fall by 0.8%-1.4%

Food & drink

Increase by 0.8%

Household, consumer goods

Fall by 4.7%

DIY/hardware/

Fall by 6.0%

Entertainment

Fall by 1.9%

Books & stationery

Fall by 1.9%

Other

Fall by 1.0%

Internet sales*

Increase 55%

(* includes retail merchandise only, not tickets
or travel)

This relates to major sectors only.

The performance of individual businesses may be very much better
or very much worse than the above forecast.

Two Hard Years to Come: Who Benefits and Loses?
Although the financial services sector expects to lose 100,000 jobs,
the areas that are least affected by the downturn will be prosperous
ones, either attractive in themselves or recently modernised, with
a good range of shops, surrounded by middle-class dormitory areas,
particularly those with a high proportion of older 45-60 year people
(low mortgages, high salary, high net worth).

Internet sales will continue to boom, increasing by a cumulative
55% per year.

Middle-of-the-road stores and franchisees will have a problem -
too expensive and uninteresting for the poor and the strugglers,
their clientele will become increasingly elderly. More prosperous
consumers will also avoid them in favour of a combination of more
aggressive discounters and quality middle-class shopping.

Successful business areas will include mothers and babies (at last,
a baby boom), food supermarkets, electronic games, recreational
wear and cycling. Good quality environmental/ethical retailers should
do reasonably well if what they do is related to what people prize,
they tell a good story, and they are located in a reasonable shopping
area.

This could be the time, when multiple retailers with hundreds of
stores decide to close 20% to 30% of their retail branches to concentrate
on the Internet and their remaining more successful outlets.

The Crisis: 2008-2010 Retailing's Best of It and Worst
of It

The Worst of It

The Best of It

Second- and third-tier shopping centres

London retail

Out-of-town retail parks, particularly remote and/or nondescript
ones

Internet retailing

Nondescript second and third rank towns such as Northampton,
Coventry, Bradford, Banbury, Huddersfield